Rancho Cordova firm comes up empty in bid to win $11 million from stem cell agency

Robin C. Stracey, the head of a small cellular therapy firm in Rancho Cordova, has seen better months than November.

His woes began Nov. 16 when he received bad news from California’s $3 billion stem cell agency. The agency gave an informal thumbs down to an $11 million proposal from his firm, Cesca Therapeutics Inc.

The money would have helped to finance the final-stage testing of a cell therapy for critical limb ischemia. The blood circulation disease afflicts 2 million people in the United States, many of them diabetic, and leads to 200,000 leg or foot amputations a year.

The unwelcome news from the stem cell agency blew out Cesca’s stock price. By the end of the week, Stracey, chief executive officer of the firm, had seen the stock plummet, at one point, by more than 50 percent, flirting with a new 52-week low. The stock closed at 35 cents on Nov. 20. It had recovered to 40 cents by Friday’s close, in part on the news that Medicare would provide coverage to U.S. patients participating in the critical limb ischemia study. Of the 224 patients involved, 202 will be tested in the United States, Stracey said.

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In an interview with The Sacramento Bee, Stracey said he was extremely disappointed by the agency’s reluctance to approve the proposal from Cesca, which has more than 100 employees, about 70 of them in Rancho Cordova and the rest at offices in Emeryville and India.

The company was formerly called ThermoGenesis before its merger in 2013 with a Los Angeles firm that also works in the stem cell industry. It has struggled over the years to maintain profitability. The company’s stock topped $6 during parts of 2003 and 2004 before skidding sharply when the economic downturn hit.

Despite its recent troubles, Stracey – who took over as CEO in June – expressed confidence that the firm could proceed with its clinical trial – with or without help from the California Institute for Regenerative Medicine, or CIRM, as the stem cell agency is formally known.

“We believe the science to be sound and our clinical results so far are very compelling,” Stracey said in a phone conference with stock analysts. “Our financing challenge notwithstanding, we do not see any reason or justification for sidelining or shelving the program.”

The story of CIRM and Cesca began last summer when the firm prepared its application for funding. Usually little is publicly known about the internal workings of the CIRM grant process. But the Cesca case is illuminated by the firm’s filings with the Securities and Exchange Commission and Stracey’s comments.

CIRM declined to comment, citing its long-standing policy of confidentiality on such matters.

CIRM was created by California voters in 2004 to turn stem cells into cures, a goal it has not yet achieved. Stem cell therapies remain far from the marketplace, although the agency is moving quickly to help finance more clinical trials. Such tests are the final steps before the federal government approves widespread use of a therapy.

Relatively speaking, Cesca’s proposal is close to winning federal approval. Its plan calls for a Phase III trial, which is the last step before commercialization. Cesca plans to recruit 224 people over a two-year period to try out a process called SurgWerks. Bone marrow cells would be taken from the patient and injected into a leg or foot. The goal is to stimulate regeneration of blood vessels, promote wound healing and preserve the limb.

The company has already raised $5.5 million from one of its institutional investors for the trial, whose total cost is estimated at $20 million. An additional $9.5 million from the same investor was contingent on approval of the funding from the stem cell agency.

So it was not exactly a bright spot when the stem cell agency notified Stracey about the questions raised behind closed doors by its blue-ribbon scientific reviewers. The agency’s directors were unlikely to approve the application, Stracey was told, and he immediately withdrew the proposal.

Normally, withdrawal of an application receives little notice. CIRM does not disclose such events. Discussion of the reasons almost never surfaces. But Stracey issued a press release on Nov. 16 that included the company’s bleak quarterly earnings and an announcement of the withdrawal.

Later that day, Stracey conducted a teleconference earnings call in which one stock analyst, Jason Kolbert of the Maxim Group, sharply questioned the CEO. According to the transcript, Kolbert said, “I’m just really struggling with what’s the future of the company and how could you have been so far off … I want to see you take some responsibility for what’s happened (with CIRM) ...”

The following day, however, Maxim Group reaffirmed its buy recommendation on the stock, although with a target price of $1. H.C. Wainwright, the other analyst that follows the company, also maintained a buy recommendation following the earnings call.

Stracey said later in an interview that he takes the CIRM critique seriously, although the company had not yet had a full discussion with the agency. Stracey said he anticipates that the company will have more than one session with CIRM officials to examine the details of what reviewers had to say.

Stracey said some of the criticism was objective. But some was biased, he said, against a key scientific underpinning of the application.

In the earnings call, Stracey said, “There are people who run the allogeneic side of the debate that don’t believe autologous treatments are likely to be the winners at the end of the day, and there are people who are on the autologous side that think otherwise.”

Cesca’s proposal uses autologous cells, ones derived from the patient and transplanted to a different location in the same body. Allogeneic cells come from another person.

In the interview later in the week, Stracey said that Cesca researchers are taking a “deep dive” into the CIRM critique, which also involves patient enrollment expectations and the trial’s statistical plan. Stracey said his intention is to use the remarks to strengthen the proposal.

As for the remaining millions in contingent financing, Stracey said he is working with the investor, Sabby Capital of New York, which is also the single largest investor in Cesca, in hopes of maintaining that stream of cash.

Stracey said he thinks funding from the state’s stem cell agency remains a possibility. But he also said that he wanted to move quickly on starting the clinical trial. Given the time constraints, Stracey said it was more likely that Cesca would partner with another enterprise rather than resubmit a proposal to the state of California.

The SurgWerks therapy is not the only thing Cesca has in the pipeline. Nine other products are in clinical development. Cesca also differs from the many biotech companies that have no sales. Cesca had net revenue of $2.8 million in its fiscal first quarter, although it reported a net loss of $3.4 million at the same time. The company also said it will save $3.3 million as the result of 15 layoffs in September and other cutbacks.

Cary Adams, CEO of Medforce LLC, a Sacramento firm aimed at supporting medical device companies, said that Cesca is “well positioned to succeed.”

“It would be a loss to the community if Cesca doesn’t make it through to the end,” he said.

David Jensen has covered the California stem cell agency since 2005, publishing more than 4,000 items on his blog, the California Stem Cell Report.